Saylor URL: http://www.saylor.org/books Saylor.org
The monthly payment can be calculated as
mortgage factor × principal ÷ 1,000.
So, if you were considering purchasing a house for $250,000 with a $50,000 down
payment and financing the remaining $200,000 with a thirty-year, 6.5 percent
mortgage, then your monthly mortgage payment would be 6.32 × $200,000 ÷ 1,000 =
$1,264. If you used a fifteen-year mortgage, your monthly payment would be 8.71 ×
$200,000 ÷ 1,000 = $1,742. If you got the thirty-year mortgage but at a rate of 6
percent, your monthly payment would be $1,200.
Potential lenders and many Web sites provide mortgage calculators to do these
calculations, so you can estimate your monthly payments for a fixed-rate mortgage if
you know the mortgage rate, the term to maturity, and the principal borrowed.
Mortgage Designs
So far, the discussion has focused on fixed-rate mortgages, that is, mortgages with fixed
or constant interest rates, and therefore payments, until maturity. With an adjustable-
rate mortgage (ARM), the interest rate—and the monthly payment—can change. If
interest rates rise, the monthly payment will increase, and if they fall, it will decrease. By
federal law, increases in ARM interest rates cannot rise more than 2 percent at a time,
but even with this rate cap, homeowners with ARMs are at risk of seeing their monthly
payment increase. Borrowers can limit this interest rate risk with a payment cap, which,
however, introduces another risk.